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Cempra Looks A Lot Like Trius Right Before It Was Acquired By Cubist

Cempra (NASDAQ: CEMP) is now in the thick of a phase 3 trial for solithromycin, a new antibiotic designed to treat bacterial pneumonia. Enrollment is 90% complete, with topline results expected in Q1 2015.The last time a small cap biotech successfully completed a phase 3 study for a new antibiotic, it was acquired within months by a midcap. I'm referring to the September 2013 acquisition of Trius Therapeutics by Cubist Pharmaceuticals CBST. Cubist was after an antibiotic Trius was developing called tedizolid phosphate for the treatment of acute skin infections caused by methicillin resistant staph [MRSA]. I wrote about this new antibiotic back in October 2012.

Trius completed its second phase 3 on tedizolid in April, releasing results later that month. At the time of release Trius was trading at $7. It was acquired in September for $13.50 a share. Cubist went on to brand tedizolid as Sivextro and see it through approval, which it received on June 20th this year.

There is a hidden advantage in the niche of new antibiotics that doesn't exist in most other segments of the biotech world. That is, the government provides funding to companies to specifically bring new antibiotics to the market. That may sound prosaic, as government funding is everywhere and never guarantees success in the market. However, in the case of trial stage drugs, government funding is more important as a signal of favor than it is for the actual amount of money given.

In other words, it is the government itself that is actively encouraging the development of these drugs, and again the government itself that will decide, through its agent the FDA, whether the drugs get approved. The funding in that case is a signal that the government wants the drug approved, increasing the chances that it eventually will be.

One could counter and say that orphan drugs are also encouraged by the government, there are lots of those and certainly not all of them get approved. However, orphan status is not exactly "ctive encouragement per se by the government as is direct funding. Rather an expedited regulatory pathway for approval if the drug candidate meets certain criteria like a small enough patient base. In that way orphan status is more passive encouragement rather than direct active funding by government. Nevertheless orphan status does increase the chances of approval as judging by the percentage of orphans that are approved versus the overall FDA approval rate for all drugs.

One could also claim that many companies that receive government funding fail, and that is certainly true. The answer to that objection is that the government cannot make a company succeed in the marketplace, but it can allow a product to enter the marketplace by approving it, and that itself leads to major trading opportunities, even if in the end a drug fails in the market.

Getting back to Trius and Cempra, Trius also received government funding for tedizolid throughout its development. Trius had been working with the Department of Defense, and had partnerships with various government funding entities since September 2008. Cempra currently has a deal with BARDA, the Biomedical Advanced Research and Development Authority through a government program called Broad Spectrum Antimicrobials, or BSA. The company has received $4.9M so far this year from BARDA.

The amount of money itself is paltry compared to the company's cash burn. Cempra lost over $16M just last quarter. But again it's not the amount, but the source of the money that's important-the boss of the very agency that will in the end decide if Cempra's solithromycin gets approved.

Cempra also has a MRSA antibiotic in the pipeline just like Trius did, as well as a gonorrhea treatment along with its flagship pneumonia antibiotic, so there are other baiting factors at play in a possible acquisition down the line.

Bottom line, if topline results for solithrmycin are positive in Q1 2015, don't be surprised if some mid or large cap pharma swoops down in offering a premium at that point, just like what happened to Trius.

Disclosure: No positions in any stocks mentioned at the time of this writing.

The following article is from one of our external contributors.
It does not represent the opinion of Benzinga and has not been edited.